To incorporate or not to incorporate: Taxing Considerations

So, at this point you have decided on a name. Now, what about the ending? Corp, Co., LLC, Ltd... and what does it matter anyway....

Well, it could make a huge difference to you depending on the type of business you have, how susceptible to liability is your company and its products, how many partners or investors are involved in the decision making process and/or whether you are going to be a sole proprietor. This decision will ultimately be a tax based decision.

Corporations are considered individuals in the eyes of the IRS and generally takes the same deductions and pays taxes on net income or loss the same as a sole owner would, however, any profits that are made by the corporation after expenses and taxes, get distributed to shareholders who then must declare that income on their individual income tax returns and pay tax again on the profits that the corporation has already paid taxes on. So, in reality, any remaining profit after loses and taxes of the corporation, gets taxed again through the shareholders. Furthermore, shareholders can not deduct any of the corporation's loss on their individual income taxes.

S-Corporations are a bit different as they can avoid double taxation if they meet IRS requirements and file additional forms with the IRS within an allotted time frame. S-Corps are exempt from federal income and are treated much the same as a partnership. S-Corps are taxed on some capital gains and passive income. Shareholders include their share of the company's income and loss, deductions and credits on their own personal income tax returns.

Taxation on limited liability company's depends on how many members or managers the company has. If there is only one member, the company can be considered disregarded in the eyes of the IRS and file taxes under the sole member/manager's social security number. The company can decide whether to obtain an EIN number for tax purposes. If the limited liability company has multiple members/managers, the company can choose to be taxed as either a corporation or a partnership - an EIN (Employer Identification Number) at this point is necessary.

Needless to say, this is something that should be discussed with someone who understands your finances, the company's potential or weaknesses and can give you various tax scenarios to consider.

Illinois Registered Agent, Inc.